Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
Gold, as other markets, right now stands under impact of major driving factor - US interest rates. Thus, as 10-year yield has jumped above 3% again last week - gold has dropped to 1285 area. Here we mostly watch for reverse H&S pattern and its target around 3.35%. It means that Gold probably will continue to be under pressure.
Thursday data showed a tightening U.S. labor market and mid-Atlantic factory activity picking up, bolstering
expectations the Federal Reserve will raise interest rates next month. Indeed, according to Fed Fund Watch tool by CME, there is 100% expectation that Fed will rise rate in June meeting to 2%:
Nevertheless, volatility on gold market could increase. Italian investors foresee some debt crisis, which could have harder impact on EU economy, even compares to Greece. Their concern is based on new government that should take country this week. One of the major points of a new program is stimulating and ramping spending, which could significantly hit debt market and Italian budget, which is far from optimal one right now.
"Gold got stronger off Italian geopolitics and the sell-off in Italian bond markets," said Josh Graves, senior commodities strategist at RJO Futures. This caused more volatility in global equities, which also provided gold support, Graves added.
"A debt crisis in Italy would have a far bigger impact than one in Greece. Gold would profit as a result," Commerzbank analysts said in a note.
Italian investors have very optimistic view on gold market, may be because they overvalue the importance of ongoing processes there:
Earlier, the sentiment index in gold was indicating it was strongly oversold while the dollar was heavily overbought as U.S. inflation measures were rising, said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan. "We think there is room for a strong rally into the summer and we have a gold target of $1,430 by August," Torlizzi said.
We agree that gold market was strongly overbought two months ago. But right now, as recent CFTC data shows, long positions were significantly unwound and now stand almost two times lower compares to April values:
Spot gold is still expected to hit $1,302 per ounce as it has stabilized around a support at $1,287, Reuters technical analyst Wang Tao said. This is more weighted view, on our opinion.
Another supportive factor for gold could become US-China trade war. Two weeks ago when we've touched this topic, major Chinese export companies haven't show significant reaction on first US tariffs steps. But situation becomes worse. Our opinion is China stands in far more depending from US. This explains why China agrees to open domestic market for US companies, including insurance and other spheres. In fact US forces China to bow it's pressure. If situation will continue to ease - this will bring no support to gold, but appearing of new tensions could add volatility on gold market.
Fathom analysts keep an eye on this problem and report that reaction of Chinese exporters has become stronger and more negative. Now they do not ignore ongoing processes in this sphere.
CEI index weights together US listed-firms that derive a large proportion of their revenue from China and would therefore be most sensitive to retaliatory sanctions in a trade war.
As Fathom points - "The strong dollar and the slowdown in China’s economy might explain some of the decline over the last month or so, but politics seems to be the main driver. A benign outcome to trade negotiations, or one in which China agrees to open up its domestic market, should push the CEI higher, while a further escalation in tensions and the imposition of trade tariffs would probably have the opposite effect."
That's being said, currently we do not see big positive drivers for gold market in nearest future. Rising of US interest rates will keep gold market under pressure, while there are too much uncertainty about new Italian domestic economy policy and how this will impact markets. US-China trade war has more chances to impact gold market, but currently this problem takes back seat as counter parties try to find a compromise.
Only some unexpected issues could change situation drastically. Say, some large geopolitical escalation (for example, around Israel) or, natural disaster - Hawaii earthquake will come out of control or trigger big tectonic processes that could impact US west coast. But - this is out of our control.
Technical
Monthly
Last four months gold stands in rather tight range. This is range of January - all following months were spent inside its range. In May gold is taking step lower and now we see warning signs in this behavior. As we've pointed in our last research -
"most important moment for long-term gold right now is ability to move higher. 1327 level is long-term COP target of AB-CD started at 1046$, in July 2015. First it was reached in July 2017. As we've said above, after logical minor bounce price returns back to it. But right now it should be an action higher, to next 1450 target, which is OP of the same AB-CD.
If gold will not be able to do it - strong drop is possible, because price will fail to proceed next extension leg, showing inability and lack of strength to do it. This could break whole AB-CD construction. Besides, this standing below "B" point also keep door open for downside butterfly. As longer gold will stand under resistance as weaker it position will be."
Now take a look at price action that we have. Market has failed to break 1360 top, which means that it has failed to proceed to OP target. Which, in turn, means breaking of CD leg. This process has not finished yet, but signs that we see right now makes us worry.
Besides, we have W&R of 1360 COP top, which also has bearish sentiment.
Third detail here is turning of the trend. Now market stands below MACDP shows unconfirmed bearish monthly trend. Yes, everything still could happen - this could turn to bullish grabber instead and overall drop is not significant by far. But I would prefer to see clear bullish picture of 1380 level breakout. Opposite things that we see right now significantly reduce attractiveness of long-term bullish position on gold market.
Based on monthly chart, it seems that nearest target is 1368 Yearly Pivot, as gold has failed even to touch YPR1 around 1391.
Weekly
This chart shows that strong K-support area stands in company with YPP around 1266-1273. Downward action doesn't take a shape of collapse and holds gradual, so, point of no-return has not been passed yet.
Mostly longer-term forecast will depend on price behavior around major support. If gold will find some power to hold above it - upside action still could be re-established, weekly OP could be reached and may be we still will get bullish grabber on monthly. But this probably will happen in last week in May.
On coming week we will track downside action to 1265-1270 area.
Daily
There are two major issues on daily chart. First is our AB-CD pattern that we're working with for last 2 months. As OP target has been broken down, next target is XOP @1262 area, which stands very close to weekly strong support area and probably could be joined with this support cluster.
Second - current stop in downside action. As we've said in our daily video, this is reaction on daily OS right at major 5/8 Fib support area. As a result, market could spend some time around, showing upside bounce. Still taking in consideration shy respect of OP target and strong drop right to Fib level - hardly upside bounce will be significant.
Finally, gold has dropped through MPS1. This is the sign that current drop is not a retracement within bull trend, but isolated bearish trend.
That's being said, our trading plan mostly suggests downside continuation to 1260-1270 area as soon as intraday retracement will be over. It means that this retracement should provide chance for position taking:
Intraday
First, that we have to do next week, guys, is to control upside action. on 4H there could be at least two different scenarios - either minor action to 1300 or, chances to form reverse H&S and better upside perspectives. That's why, first we need to understand what will happen. If retracement will be very heavy and market barely will reach 1300 - be prepared for re-establishing of downside action on daily right to our major weekly support. While, if gold will break 1300 area easily - don't be short:
This is also important because - 1300 is former lows, and hourly K-resistance and Agreement. On Monday we will watch for XOP target completion around 1297 and market reaction. This is first area for short position taking. But market should keep choppy behavior as it stands right now. Any signs of upside thrust should be treated as warning sign and hold us from taking short position:
Conclusion
If no geopolitical surprises or natural disaster will happen - gold will remain under pressure in foreseeable future. Within few weeks we expect reaching of major support around 1260-1270 area. Depending on what will happen there - will determine following long-term direction of the market.
On coming week we will keep an eye on upside retracement, trying to not miss chance to go short. First, we need understand its final point - either around 1300 or appearing of reverse H&S pattern and stronger upside action.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Gold, as other markets, right now stands under impact of major driving factor - US interest rates. Thus, as 10-year yield has jumped above 3% again last week - gold has dropped to 1285 area. Here we mostly watch for reverse H&S pattern and its target around 3.35%. It means that Gold probably will continue to be under pressure.
Thursday data showed a tightening U.S. labor market and mid-Atlantic factory activity picking up, bolstering
expectations the Federal Reserve will raise interest rates next month. Indeed, according to Fed Fund Watch tool by CME, there is 100% expectation that Fed will rise rate in June meeting to 2%:
Nevertheless, volatility on gold market could increase. Italian investors foresee some debt crisis, which could have harder impact on EU economy, even compares to Greece. Their concern is based on new government that should take country this week. One of the major points of a new program is stimulating and ramping spending, which could significantly hit debt market and Italian budget, which is far from optimal one right now.
"Gold got stronger off Italian geopolitics and the sell-off in Italian bond markets," said Josh Graves, senior commodities strategist at RJO Futures. This caused more volatility in global equities, which also provided gold support, Graves added.
"A debt crisis in Italy would have a far bigger impact than one in Greece. Gold would profit as a result," Commerzbank analysts said in a note.
Italian investors have very optimistic view on gold market, may be because they overvalue the importance of ongoing processes there:
Earlier, the sentiment index in gold was indicating it was strongly oversold while the dollar was heavily overbought as U.S. inflation measures were rising, said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan. "We think there is room for a strong rally into the summer and we have a gold target of $1,430 by August," Torlizzi said.
We agree that gold market was strongly overbought two months ago. But right now, as recent CFTC data shows, long positions were significantly unwound and now stand almost two times lower compares to April values:
Spot gold is still expected to hit $1,302 per ounce as it has stabilized around a support at $1,287, Reuters technical analyst Wang Tao said. This is more weighted view, on our opinion.
Another supportive factor for gold could become US-China trade war. Two weeks ago when we've touched this topic, major Chinese export companies haven't show significant reaction on first US tariffs steps. But situation becomes worse. Our opinion is China stands in far more depending from US. This explains why China agrees to open domestic market for US companies, including insurance and other spheres. In fact US forces China to bow it's pressure. If situation will continue to ease - this will bring no support to gold, but appearing of new tensions could add volatility on gold market.
Fathom analysts keep an eye on this problem and report that reaction of Chinese exporters has become stronger and more negative. Now they do not ignore ongoing processes in this sphere.
CEI index weights together US listed-firms that derive a large proportion of their revenue from China and would therefore be most sensitive to retaliatory sanctions in a trade war.
As Fathom points - "The strong dollar and the slowdown in China’s economy might explain some of the decline over the last month or so, but politics seems to be the main driver. A benign outcome to trade negotiations, or one in which China agrees to open up its domestic market, should push the CEI higher, while a further escalation in tensions and the imposition of trade tariffs would probably have the opposite effect."
That's being said, currently we do not see big positive drivers for gold market in nearest future. Rising of US interest rates will keep gold market under pressure, while there are too much uncertainty about new Italian domestic economy policy and how this will impact markets. US-China trade war has more chances to impact gold market, but currently this problem takes back seat as counter parties try to find a compromise.
Only some unexpected issues could change situation drastically. Say, some large geopolitical escalation (for example, around Israel) or, natural disaster - Hawaii earthquake will come out of control or trigger big tectonic processes that could impact US west coast. But - this is out of our control.
Technical
Monthly
Last four months gold stands in rather tight range. This is range of January - all following months were spent inside its range. In May gold is taking step lower and now we see warning signs in this behavior. As we've pointed in our last research -
"most important moment for long-term gold right now is ability to move higher. 1327 level is long-term COP target of AB-CD started at 1046$, in July 2015. First it was reached in July 2017. As we've said above, after logical minor bounce price returns back to it. But right now it should be an action higher, to next 1450 target, which is OP of the same AB-CD.
If gold will not be able to do it - strong drop is possible, because price will fail to proceed next extension leg, showing inability and lack of strength to do it. This could break whole AB-CD construction. Besides, this standing below "B" point also keep door open for downside butterfly. As longer gold will stand under resistance as weaker it position will be."
Now take a look at price action that we have. Market has failed to break 1360 top, which means that it has failed to proceed to OP target. Which, in turn, means breaking of CD leg. This process has not finished yet, but signs that we see right now makes us worry.
Besides, we have W&R of 1360 COP top, which also has bearish sentiment.
Third detail here is turning of the trend. Now market stands below MACDP shows unconfirmed bearish monthly trend. Yes, everything still could happen - this could turn to bullish grabber instead and overall drop is not significant by far. But I would prefer to see clear bullish picture of 1380 level breakout. Opposite things that we see right now significantly reduce attractiveness of long-term bullish position on gold market.
Based on monthly chart, it seems that nearest target is 1368 Yearly Pivot, as gold has failed even to touch YPR1 around 1391.
Weekly
This chart shows that strong K-support area stands in company with YPP around 1266-1273. Downward action doesn't take a shape of collapse and holds gradual, so, point of no-return has not been passed yet.
Mostly longer-term forecast will depend on price behavior around major support. If gold will find some power to hold above it - upside action still could be re-established, weekly OP could be reached and may be we still will get bullish grabber on monthly. But this probably will happen in last week in May.
On coming week we will track downside action to 1265-1270 area.
Daily
There are two major issues on daily chart. First is our AB-CD pattern that we're working with for last 2 months. As OP target has been broken down, next target is XOP @1262 area, which stands very close to weekly strong support area and probably could be joined with this support cluster.
Second - current stop in downside action. As we've said in our daily video, this is reaction on daily OS right at major 5/8 Fib support area. As a result, market could spend some time around, showing upside bounce. Still taking in consideration shy respect of OP target and strong drop right to Fib level - hardly upside bounce will be significant.
Finally, gold has dropped through MPS1. This is the sign that current drop is not a retracement within bull trend, but isolated bearish trend.
That's being said, our trading plan mostly suggests downside continuation to 1260-1270 area as soon as intraday retracement will be over. It means that this retracement should provide chance for position taking:
Intraday
First, that we have to do next week, guys, is to control upside action. on 4H there could be at least two different scenarios - either minor action to 1300 or, chances to form reverse H&S and better upside perspectives. That's why, first we need to understand what will happen. If retracement will be very heavy and market barely will reach 1300 - be prepared for re-establishing of downside action on daily right to our major weekly support. While, if gold will break 1300 area easily - don't be short:
This is also important because - 1300 is former lows, and hourly K-resistance and Agreement. On Monday we will watch for XOP target completion around 1297 and market reaction. This is first area for short position taking. But market should keep choppy behavior as it stands right now. Any signs of upside thrust should be treated as warning sign and hold us from taking short position:
Conclusion
If no geopolitical surprises or natural disaster will happen - gold will remain under pressure in foreseeable future. Within few weeks we expect reaching of major support around 1260-1270 area. Depending on what will happen there - will determine following long-term direction of the market.
On coming week we will keep an eye on upside retracement, trying to not miss chance to go short. First, we need understand its final point - either around 1300 or appearing of reverse H&S pattern and stronger upside action.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
